College Loans

Article Type: Quick and Dirty

If you aren't a star duck caller or a world-renowned pizza spinner and can't land a scholarship, that doesn't mean you have to give up on going to college. There are plenty of folks who are happy to lend you money…for a price.

The short version: loans need to be paid back with interest, which means that if you take out $10,000 in student loans, you're going to be paying back way more than $10,000 after all the dust has settled.

Federal Loans vs. Private Loans

If you absolutely need to borrow money, it's best to borrow from the federal government. The exact benefits of these federal programs vary, but interest rates are usually better on federal loans than on private loans. Federal loans don't usually have to be repaid until after you graduate, and in some cases, you can apply for help if you don't get a job right away or struggle with your debt after graduation.

Private loans come from banks and credit unions, just like the loans you might get for your car or house. Some banks have special loans just for students while others offer general personal loans, lines of credit, or even mortgages for families who need to do so to pay for college.

Have we mentioned "ugh"?

Yeah, ugh.

The problem with private loans is that banks are a lot more strict about who gets money. If you (or your parents) don't have a very good history of repaying loans or paying your bills on time, you might not be able to get a private loan.

And if you do get a private loan, you'll pay more interest on it than you would with a federal loan—and you'll usually have to start repaying it right away. If you get a line of credit in September to pay for school, you might have to start making payments as early as October. Yeah, banks were never really our friends.

Trust us. Go with the federal loans. Here are some more thorough reasons, in case you're one of those "show me the literature" types:

Interest rates. If you take out a loan, you're
expected to pay back not only the principal (aka the several thousand
dollars you actually borrowed), but also the interest on the principal. Rates
on federal education loans range from low to low-ish, and they're fixed
for the duration of the loan. Rates on private loans can be of the
screw-you variety, going up as high as fifteen percent. Trust us, you want
to stick with Lady Liberty on this one.

Protection. Federal loans come with a built-in
bullet-proof vest, a helmet, and safety goggles. Okay, not really. But
they do come with certain protections that will keep the loan good
if you get into choppy waters on the Sea of Finance. Federal loans allow
you to obtain a loan without a cosigner (aka Mom) or passing a credit
check. You also don't have to start paying back loans until you actually
graduate. Finally, los federales will allow you to temporarily
defer loan payments post-graduation should you be unable to find a job
with your double degrees in philosophy and theology. Private banks...hmm,
not so sympathetic to the plight of the Everyman.

Better repayment options. You're a college
sophomore, merrily plowing your way through your biochemistry courses and
racking up student debt. You may not care about that debt now, but in a
couple of years, it's going to come out of nowhere and wallop you upside
the head. And here's yet another reason to go with the feds for education
loans: there will be a wide range of repayment plans for you to
choose from, including plans that give you extra time to pay up and plans
that increase payment amounts as you get older and your income
(theoretically) increases.

Forgiveness. We're not talking the lyrics from
a Don Henley song, but rather the possibility that the federal
government may pay off your student loans for you. "How can such a thing
be?" you ask. Aren't these the same guys who run the IRS? Yes indeedy, but
just because the federal government eats up taxes like a kid eats
Twinkies, doesn't mean the feds don't have a heart. One way to have your debt forgiven is if your school closes or you teach disadvantaged children. Here are other ways the feds help:

Public service professions. Read social
workers, teachers, and cops. The government feels your pain, friends. Not only
do you not get paid much, but pension reform is lurking on the horizon and
there's a chance you might get shot on the job. This is why those in public
service have their monthly loan payments capped at ten percent of their
discretionary income, and the loans are canceled altogether after ten years. That
is a sweet, sweet deal.

The twenty-five-year mark. Woohoo! You've
spent twenty-five years shoveling your income into the federal government's
maw. To celebrate this auspicious occasion, you get your student loans
canceled.

The income-based repayment plan. Okay, so this bit is kind of
confusing, but stick with us. If you sign up for this plan, the feds will limit
your federal loan payments to fifteen percent of your discretionary income,
defined as any income above 150 percent of the current poverty line. In 2011,
for example, that benchmark was $16,335. Say you borrowed $31,000—the maximum
Stafford Loan—for college, but the only post-college job you can find pays
$25,000 a year. Your monthly loan payments would be capped at $108. Earn less
than $16,335 and your loan payments would be nada. Zip. Zilch. Yes, you read
that right. Now, say you don't sign up for the income-based repayment plan, but
you still have $31,000 in student loan debt and a job that pays $25,000 a year.
You would pay better than three hundred dollars a month in loan payments. Is
this absolutely insane? Yes. But, then, so is any entity that goes to war in
Afghanistan without first reading Peter Hopkirk's The Great Game.

The Three Flavors of
Federal Loans

Now that you've decided federal loans are king, let's talk about which ones are best. Here we have three or four-ish types of loans (depending on if you want to lump Staffords together):

Stafford Direct Subsidized Loan. This is a loan from the U.S. Department of Education and is available to undergraduate students who have financial need.

Stafford Direct Unsubsidized Loan. This loan from the U.S. Department of Education can pay for graduate or undergraduate degrees. You do not need to show financial need to qualify.

Federal Perkins Loan. Colleges extend this money to students based on need.

Direct PLUS Loan. This loan is for parents who want to borrow money to send their child to school.

If you don't have a headache yet, let's break down these loans even further.

The Pros and Cons
of the Stafford Loan

Pros

Cons

It doesn't
matter if you're rich or poor: any dependent undergraduate student qualifies
for the $31,000 Stafford Loan.

You don't get
it all at once. Seriously. You can borrow up to $31,000, but that money is
given out in dollops, with no bearing on what your tuition for the year might
actually be.

Do you have
financial need? Lucky you. The feds will pay the interest on the Stafford
Loan for you while you're in school.

Did the FAFSA
decide you don't have financial need? Unlucky you.You're responsible for
every penny of interest on the Stafford Loan.

Even if the
U.S. government won't subsidize your interest payments, the interest rate on
the Stafford Loan is like the Mississippi River during a drought: really low.

Sometimes,
paying interest—no matter how low the rate is—can feel like someone's
rubbing salt in an open wound.

Basically, the Stafford Loan is big and bad, but it doesn't always deliver.

The Pros and Cons
of the Perkins Loan

Pros

Cons

Do you have an
exceptional financial need? The Perkins Loan provides an extra $27,000 beyond
the Stafford Loan to undergrads.

You still don't
get the money all at once, which means you still might not have enough money
to pay tuition your freshman year.

Interest rates
are capped at five percent, which is...well, it's an okay rate.

Five percent is
not the 3.4 percent you can get sometimes with the Stafford Loan.

The Perkins Loan might be there when you need it. Maybe. If there's a ball game on though, it's gonna go sit on the couch with pretzels and a beer instead.

The Pros and Cons
of the Parent PLUS Loan

Pros

Cons

Your parents
can borrow up to the total cost of your attending college...

...but then
they have to repay the loan. Good luck convincing Mom and Dad to take on tens
of thousands of dollars of debt on your behalf so you can go to Sarah Lawrence.

You don't have
to pass a credit check to obtain the Parent PLUS Loan...

...but your
folks do, and you'd be surprised at the seemingly minor items on a credit
check that can blow a loan application out of the water.

Interest rates
are capped...

...at 7.9
percent. That's heading into "Ouch!" territory.

You're two loans in. Are you still trying to figure out how to pay the bills? Time to turn to the 'rents and ask them to sign themselves up for the Parent PLUS Loan.

If the Stafford and the
Perkins Loans aren't enough to fund your education, and your parents can't or
won't go in for the PLUS Loan, then you might have to turn to a private lender.
Tread with caution here. There are reliable lenders, but there are also sharks
in the waters. Shop around before deciding on a loan, and read the fine print
with a magnifying glass and your lawyer in the room.